Suppose a small economy produces only two types of goods in one year:
So, total final output or GDP is:
Here, the ₹200 crore worth of machines, buildings and tools is called gross investment, because it represents the capital goods produced in the economy before deducting depreciation.
So,
Impact of Import of Capital Goods
If the country imports capital goods worth ₹100 crore, then these imported capital goods will also add to the productive capacity of the domestic economy.
So,
This is because capital goods worth ₹300 crore are now available in the domestic economy.
Impact of Export of Capital Goods
However, if the country also exports capital goods worth ₹50 crore, then these exported capital goods will not remain available for use within the domestic economy.
So,
Thus, imported capital goods increase gross investment, while exported capital goods reduce the capital goods available for domestic investment.
Now Add Depreciation
Suppose old machines and buildings in the economy suffer wear and tear worth ₹40 crore during the year. This wear and tear is called depreciation.
If there is no import or export of capital goods:
This means the economy produced capital goods worth ₹200 crore, but ₹40 crore worth of existing capital was lost due to wear and tear.
Therefore, the actual new addition to the economy’s capital stock is only ₹160 crore.
Net Investment After Import and Export
If imports and exports are also considered:
This means that after considering imported capital goods, exported capital goods and depreciation, the actual new addition to the economy’s capital stock is ₹210 crore.
Thus, gross investment shows total capital goods produced, while net investment shows the real increase in the productive capacity of the economy after accounting for depreciation.
Gross Capital Formation
Inventory
In economics, the stock of unsold finished goods, or semi-finished goods, or raw materials which a firm carries from one year to the next is called inventory.
Example-
The classification of the economy into different sectors helps us understand the nature, role and contribution of various economic activities. The primary sector provides natural resources and raw materials, the secondary sector converts these resources into finished goods, and the tertiary sector supports production and consumption through services.
In modern economies, the quaternary sector and quinary sector have become increasingly important due to the growth of knowledge, research, innovation, data, technology and high-level decision-making. Thus, the shift from primary activities to industrial, service and knowledge-based activities reflects the structural transformation of an economy. A balanced development of all sectors is essential for employment generation, productivity growth and sustainable economic development.
What is investment in economics?
Investment in economics refers to that part of final output which consists of capital goods.
What are capital goods?
Capital goods are goods used to produce other goods and services in the future. Machines, tools, factory buildings, equipment, roads and infrastructure are examples of capital goods.
What is gross investment?
Gross investment refers to the total value of capital goods produced or available in an economy before deducting depreciation.
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